Please use this identifier to cite or link to this item: http://cmuir.cmu.ac.th/jspui/handle/6653943832/57236
Title: Pair trading based on quantile forecasting of smooth transition GARCH models
Authors: Cathy W.S. Chen
Zona Wang
Songsak Sriboonchitta
Sangyeol Lee
Keywords: Economics, Econometrics and Finance
Issue Date: 1-Jan-2017
Abstract: © 2016 Elsevier Inc. Pair trading is a statistical arbitrage strategy used on similar assets with dissimilar valuations. We utilize smooth transition heteroskedastic models with a second-order logistic function to generate trading entry and exit signals and suggest two pair trading strategies: the first uses the upper and lower threshold values in the proposed model as trading entry and exit signals, while the second strategy instead takes one-step-ahead quantile forecasts obtained from the same model. We employ Bayesian Markov chain Monte Carlo sampling methods for updating the estimates and quantile forecasts. As an illustration, we conduct a simulation study and empirical analysis of the daily stock returns of 36 stocks from U.S. stock markets. We use the minimum square distance method to select ten stock pairs, choose additional five pairs consisting of two companies in the same industrial sector, and then finally consider pair trading profits for two out-of-sample periods in 2014 within a six-month time frame as well as for the entire year. The proposed strategies yield average annualized returns of at least 35.5% without a transaction cost and at least 18.4% with a transaction cost.
URI: https://www.scopus.com/inward/record.uri?partnerID=HzOxMe3b&scp=84995480448&origin=inward
http://cmuir.cmu.ac.th/jspui/handle/6653943832/57236
ISSN: 10629408
Appears in Collections:CMUL: Journal Articles

Files in This Item:
There are no files associated with this item.


Items in CMUIR are protected by copyright, with all rights reserved, unless otherwise indicated.